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The fastest way to lose confidence in investing is not market volatility, but a tax surprise. Short-term profits often feel like “quick wins”, but the tax treatment can materially change your post-tax return, especially if you trade frequently, rebalance often, or sell assets before they cross the long-term holding threshold. That is why understanding short term capital gains is a part of building a disciplined investing approach.
In this guide, we will break down what STCG means, how the STCG tax works across asset classes in FY 2025–26 (AY 2026–27), how to calculate it, what set-off rules apply, and how to reduce the tax impact legally, without stepping into aggressive shortcuts.
Key Takeaways
Short term capital gains arise when assets are sold within the prescribed holding period, typically 12 or 24 months
For FY 2025-26, short term capital gains on listed equity shares and equity-oriented mutual funds are taxed at 20% under Section 111A
For most other assets, short term capital gains are taxed as per your applicable income tax slab
Short-term capital losses can be set off against both short-term and long-term gains, subject to rules
Understanding holding periods and tax rates helps investors improve post-tax returns and avoid compliance errors
What are Short-Term Capital Gains?
Short-Term Capital Gains (STCG) refers to the profit you earn when you sell a capital asset within a specified “short-term” holding period. If the sale happens within that holding period, the gain is treated as short-term; if it exceeds the holding period, it is generally treated as long-term.
A key point that many investors miss is that STCG is not a separate “type of income” in concept; it is a category of capital gains defined by holding period and asset type. What changes are the tax rate and, in some cases, how income is computed and reported.
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Holding Period Rules That Determine Short Term Capital Gains
The holding period is the first filter that decides whether your gains are short-term or long-term. In practice, the holding period differs by asset class, and recent standardisation has made this easier to interpret for many common investments.
STCG taxation is broadly split into two buckets. The first is specified equity-like assets, which are taxed at a special rate, and the second is under which most other assets are taxed at your applicable income tax slab rates.
Short Term Capital Gains on Listed Shares and Equity-Oriented Mutual Funds
When STT is paid, and the gains fall under Section 111A, STCG is taxed at a flat 20% (effective from 23 July 2024 under the updated framework). This rate typically applies to:
Listed equity shares (STT paid)
Equity-oriented mutual fund units
Units of business trusts
STCG on Other Assets
For most other capital assets, short-term gains are added to your total income and taxed at your applicable slab rate. This commonly applies to:
Real estate held up to 24 months
Many debt mutual fund scenarios
Gold held up to 24 months
Did You Know?
The proposed one-time relief to set off old long-term capital losses against short-term gains was removed in the final Tax Code 2026
Source: Business Today
How is STCG Tax Calculated?
The calculation is straightforward in principle, but accuracy depends on using the correct components and avoiding overclaiming deductions that do not apply. Before reviewing the steps, remember that STCG is calculated based on the “net gain” after reducing eligible costs and expenses directly related to the transfer.
Here is the standard computation flow:
Start with the full sale value (consideration received)
Subtract expenses incurred wholly and exclusively for the transfer (for example, brokerage or transfer charges, where applicable)
Subtract the cost of acquisition
Subtract the cost of improvement (where relevant)
The result is STCG (before any specific eligible exemptions that may apply in limited cases)
Note: Indexation is not available for short-term capital gains.
Set-Off and Carry Forward Rules for STCG
Capital gains planning becomes more precise once you understand how losses can offset gains. This matters most when markets are turbulent, and you have a mix of profitable and loss-making transactions in the same year. The core set-off principle (which continues under the long-standing framework) is:
Long-Term Capital Losses can be adjusted only against Long-Term Capital (LTCG)
Short-term capital losses (STCL) may be adjusted against both short-term and long-term capital gains, subject to applicable rules
What is the “Tax Code 2026” Update? Investors Should Note
There was discussion around a proposed one-time transitional relief that could have allowed the brought-forward LTCL to be set off against STCG during the shift to the new framework. However, reporting indicates that the final version withdrew this one-time window, reinstating the conventional restriction: LTCL against LTCG only.
This is not a small technicality. If you were expecting to utilise historical long-term losses to reduce short-term tax outgo, the planning assumption changes materially for AY 202 - 27.
STCG vs LTCG: Key Differences
The difference between short-term and long-term capital gains is not only “how long you held the asset”. It also shapes the tax rate, exemptions, and (for some asset types) whether indexation is available. To make the contrast easier, here is a simple comparison of common assets:
Factor
STCG (typical)
LTCG (typical)
Key driver
Holding period not crossed
Holding period crossed
Listed equity & equity MF
Up to 12 months; often taxed at 20% u/s 111A
Beyond 12 months; LTCG framework applies (with thresholds/exemptions as applicable)
Real estate
Up to 24 months; taxed at slab rates
Beyond 24 months; LTCG framework applies (recent reporting notes 12.5% for certain cases without indexation)
Indexation
Not available
Depends on asset/rules; several recent changes reduce or remove indexation for multiple asset classes
How to Reduce STCG Tax Legally?
You cannot “avoid” STCG if you sell within the short-term window, but you can reduce the impact through timing, set-off discipline, and better alignment between investment intent and holding period.
Before using any tactics, anchor your decision on a simple rule: do not let tax be the only reason you hold or sell; let it be the second reason. With that in mind, here are practical, compliant approaches:
Use loss set-off intelligently: If you have STCL, you can potentially offset it against STCG (and even LTCG, where allowed), reducing taxable gains
Plan exists around holding thresholds: If the fundamentals are intact and you are near the long-term cut-off (for example, 12 months for listed equity), postponing a sale may shift the gain into LTCG treatment
Track transaction costs properly: Brokerage and transfer-related expenses can affect your net gain calculation; under-reporting these may inflate taxable STCG
Avoid accidental churn: Frequent switching between funds or stocks can push more profits into the short-term bucket, increasing your effective tax drag
Conclusion: Build Returns With Tax Awareness, Not Tax Fear
Understanding short term capital gains is ultimately about protecting what you earn. When you know the holding periods, the correct STCG tax treatment, the 20% special rate under Section 111A, and the set-off boundaries for losses, your decisions become cleaner, and your post-tax outcomes improve.
If you are building a long-term portfolio, the goal should not be to eliminate STCG completely. The goal should be to ensure that short-term exits are intentional, priced correctly, and planned with full visibility into their tax consequences.
Glossary
Holding Period: The duration for which an asset is owned before being sold determines tax treatment
Section 111A: Income Tax provision that taxes certain equity-related STCG at a special rate of 20%
Securities Transaction Tax: Tax levied on the purchase or sale of listed securities on recognised exchanges
Cost of Acquisition: The original purchase price of an asset used to calculate capital gains
Short-Term Capital Loss: Loss incurred on selling an asset within the short-term holding period
FAQs
Short term capital gains arise when a capital asset is sold within the prescribed holding period, typically 12 months for listed equity shares and 24 months for real estate and certain other assets.
For listed equity shares and equity-oriented mutual funds where STT is paid, short term capital gains are taxed at 20% under Section 111A. Other assets are usually taxed according to your income tax slab.
Yes. STCG on most assets is added to your total income and taxed at slab rates. However, STCG under Section 111A (listed equity and equity mutual funds) is taxed at a special rate of 20%.
Yes. Short-term capital losses (STCL) can be offset against both short- and long-term capital gains, subject to prevailing tax rules.
The key difference lies in the holding period and tax rate. STCG applies when assets are sold within the short-term threshold and is taxed at 20% (for certain equities) or at slab rates, while LTCG applies beyond that period under different tax rules.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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